The visible hand in economics

Happiness, policies, and economics

Posted on: August 26, 2008

It is good to see the Frog Blog discussing happiness and policy – as fundamentally the goal of policy should be to promote the highest social happiness, not necessarily to promote the largest GDP number.

The article that Frog links to can be found here, and on Saturday there was an article in the paper by Chris Worthington on the subject as well. However, I get the feeling that Mr/Mrs/Miss Frog interprets this policy implication a little differently to me (and both are different to this previous post) – lets discuss.

What creates happiness.

There are two main areas where I think Frog and myself may have slightly different value judgments surrounding happiness these are:

  1. Does absolute wealth create happiness – or merely relative wealth (and expectations),
  2. How does choice and security influence happiness.

Absolute wealth and happiness

I get the feeling that Frog believes absolute wealth is not important – as we get used to this level of consumption and then are not any happier.

Although he does not admit it this is a big steaming value judgment – one that most people would probably not agree with. Am I used to my bad – yes. However, I still believe I am happier in the current situation with a bed then I would be in a situation where I never had a bed.

I do believe that in the search for simplicity, economists often do take on a default pro-growth stance – however, I find the idea of a “no-growth” stance even more confusing, as I am convinced that higher consumption (all other things equal – which is never the case!) does produce higher social happiness. I am not saying that absolute wealth is the only thing that matters (no way) but I am saying that it is a bit extreme assume that it doesn’t matter at all.

Even if these surveys had said absolute wealth did not matter (which they have not), as Chris Worthington says in his article:

self-reported happiness is a highly subjective measure with no guarantee of comparability between different cultures (or different generations). These surveys are also a bounded measure of well-being, whereas potential gains GDP are effectively unlimited, calling into question the logic of mapping one on to the other

Fundamentally – how do we know that peoples reported level of happiness is comparable over time, given that they are biased in reporting it from their current reference point. People may be in a situation where they truly are “happier” – but they may not report that they are.

Sure we “get used” to our level of consumption – but that does not mean that our current, higher, levels of consumption do not make us happy.

Choice and security and happiness

The frog also took a quote from the world changing article:

Whatever the cause, the researchers agree on one thing, the link between wealth and happiness isn’t about consumption. As Stevenson points out, it’s not about going out and buying more, but about having freedom from pain and worry, and having more days of enjoyment and more choice about what you do with those days that’s associated with happiness. So, what policies would give us less pain and more fun?

To Frog this quote implied:

It seems helping people to be happy might be as much about protecting them from the fear of future poverty and want as it is about improving their current economic status

However, to me it implied that a society where people are free to make choices will produce greater happiness.

Insofar as security and choice are complements (the areas where government can increase our liberty) we agree – however, in the areas where there is a trade off between the two I get the impression that Frog will steer more towards security, while I will steer more towards choice.

This is just a representation of our different value judgments – neither is right, and yet neither is wrong.


The point of policy is currently to maximise social happiness – trust me, if the goal was to maximise economic growth many of our policies would be abject failures.

The issue with forming these policies is the subjective nature of happiness – we all have different ideas about what it implies and what the value associated with different things are. That is why we have a democracy – as it allows us an imperfect revealed preference measure of what gives people happiness.

A society that gives people choices, security, and a voice (in some measure) is the type of society that will maximise the happiness of its citizens. This idea is not novel – and it provides the fundamental motivation behind pretty much all social sciences.

As a result, why are we acting as though choosing policies that “maximise happiness” is a new and novel idea?

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9 Responses to "Happiness, policies, and economics"

The short response would be that GDP and happiness are positively correlated. See the discussion of literature by Justin Wolfers at the Freakonoimcs blog.

Here he discusses his research with Betsey Stevenson showing that there is no Easterlin Paradox. The Easterlin Paradox is the juxtaposition of three observations:

1. Within a society, rich people tend to be much happier than poor people.
2. But, rich societies tend not to be happier than poor societies (or not by much).
3. As countries get richer, they do not get happier.

Here he discusses the new evidence that rich countries are happier than poor countries.

Here he discusses the historical evidence on the fact that rich countries are happier than poor ones and how this fact remained hidden in the data for several decades.

Here he discusses the question, Are Rich People Happier than Poor People?

Here he discusses the question, Will Raising the Incomes of All Raise the Happiness of All?

Here he goes, Delving Into Subjective Well-Being

A report in the New York Times suggests that Maybe Money Does Buy Happiness After All. Or is it just more evidence of the ongoing collapse of the Easterlin paradox. A quick summary of the main point of the article,

Economic growth, by itself, certainly isn’t enough to guarantee people’s well-being — which is Mr. Easterlin’s great contribution to economics. In this country, for instance, some big health care problems, like poor basic treatment of heart disease, don’t stem from a lack of sufficient resources. Recent research has also found that some of the things that make people happiest — short commutes, time spent with friends — have little to do with higher incomes.

But it would be a mistake to take this argument too far. The fact remains that economic growth doesn’t just make countries richer in superficially materialistic ways.

Economic growth can also pay for investments in scientific research that lead to longer, healthier lives. It can allow trips to see relatives not seen in years or places never visited. When you’re richer, you can decide to work less — and spend more time with your friends.

By and large affluence is a pretty good deal.

There’s good evidence that being unemployed makes us very unhappy: more unhappy than being working but poor. So, we need to get rid of policies that make us more likely to be unemployed poor rather than working poor.

There’s also decent evidence (Wolfers et al) that the evidence for happiness being very concave in income is wrong: happiness does continue to increase with income.

Even if we accept that average happiness doesn’t increase with wealth (and I understand that the surveys being referred to consider average happiness and the argument is that they tend to show no increase in happiness rather than a decrease), increasing aggregate wealth is still desirable because it means:
(1) An economy can accommodate more people in the manner to which the constantly happy have become accustomed (more people x constant rate of happiness = more happiness)
(2) An economy can afford more/better health care such that people live longer (more years of functional life x constant happiness = more years of happiness).
Looks like a winner to me.

@the author and hello economists at Canterbury

To answer the author’s question, why are we talking about happiness now? Because we can!

a) Suddenly psychology (cf Seligman), management (cf David Cooperrider) and psychiatry (cf Kay Jamison) are talking about the mechanisms underlying positive phenomena. An economist might say that we can now afford to attend to what is good and true rather than what is threatening and to be avoided.

b) Positive psychology is a form of complexity/chaos theory. We have empirical demonstrations in psychology (Fredrickson and Losada, 2005, American Psychologist), active research in psychology (Psychology Today, bottommost Self Development blog) and new management models (cf Gary Hamel and google Steve Jurvetson with keyword Hamel at Flickr).

c) The population will not put up with less – the rise of stakeholder influence and the resurgence of hope politics (as of last night “the choice of hope over fear” Michelle Obama).

The penultimate paragraph of the original post spells out the key psychological principles of happiness.

“A society that gives people choices, security, and a voice (in some measure) is the type of society that will maximise the happiness of its citizens. This idea is not novel – and it provides the fundamental motivation behind pretty much all social sciences.”

The key characteristics of a successful social organization are always
belonging and
personal control.
There are many models and variations on the theme as the author says starting with good old Maslow.

If we were to construct a linear model, wealth, happiness and the features of society would be three different sets of variables. You can argue which are mediators and moderators (hence the preference for non-linear dynamical models). They are evidently all necessary and rather in the category of motherhood and apple pie.

Economists might like to scour the Economist for an empirical study on voting behavior in Switzerland where there is direct democracy. People who vote (i.e., exercise control) are as happy as people one economic step higher. In simple terms, giving people control saves money! This is the essence of what is taught in management. If you want a successful organization, make sure the ordinary employee has control.

Quite obviously in competitive societies, there are winners and losers and as in every Olympic race, more disappointment than glee. It is obvious that the bottom half to two-thirds will be unhappy -bringing us back to economic and other policy – your territory.

Drink provokes the desire but takes away the performance.WilliamShakespeareWilliam Shakespeare

Another take on happiness…

Above all else…
Guard your heart…
For it is…
The wellspring of life…

Proverbs 4:23


Thanks for the replies everyone, very interesting stuff.

I think everyone agreed, in one way or another.

Matt, this article was posted today. A linear model linking economic development to happiness.

Thanks Jo, looks really interesting – I will have a closer read over it today 🙂

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